Whether you buy things in a physical shop or online, chances are you’ve been offered the ability to spread the payment of the purchase by way of smaller payments over several weeks or months. This is known as Buy Now, Pay Later, or BNPL for short.  

Making it easier to spend? 

With BNPL a third-party financing company is effectively loaning you money to fund a purchase, rather than paying the full cost upfront. 

Companies like Paypal and Klarna promote these types of agreements in the form of small loans, lines of credit or interest-free installment plans upon checkout — these are all types of BNPL financing. 

How does buy now, pay later work?

When checking out with an online retailer that offers BNPL, you’ll be offered the option to split the purchase over typically 4-6 equal installment.  

For example, if you purchase a pair of shoes for $100, you might be asked to pay $25 every two weeks until the purchase is paid in full. If you select BNPL, you’ll usually be taken to the BNPL lender’s page, where you’ll have to provide basic information such as your name, address and contact information.  

Once you do this, the BNPL company will usually run a basic credit check (an online check of your credit history) before they approve you to use their BNPL facilities. Even if you have bad credit or your credit history is thin, you may still be considered eligible. 

Not all retailers offer installment plans, but many do. BNPL is used widely to purchase electronics, home fitness equipment, clothing, furniture or even plane tickets at retailers like H&M, American Airlines, and Apple. 

Is buy now, pay later right for you? 

Buy now, pay later loans can make big-ticket purchases much more attainable for some consumers. Instead of having to pay off an item or service in one large, upfront cost, shoppers can split up their payments into more manageable chunks. 

However, using buy now, pay later loans can quickly add up if you’re not carefully tracking your purchases. Apart from the fact that you may end up paying interest in some situations, you can easily spend more than you can afford and become weighed down with monthly repayments from multiple BNPL funded purchases.  

Before you turn to buy now, pay later loans, ask yourself:

• Is it possible to save up for this purchase and pay in full? 

• Will using BNPL cost me more in the long run than paying outright? 

• Can I afford the payments and what happens if my income falls or stops, and I can’t meet the repayments? 

What can start out as a convenient way to pay can quickly and easily lead to you sleepwalk into debt. So only use BNPL if you are sure that you can afford the payments. 

Pros and cons of buy now, pay later: 

Pros: 

• Interest-free options. Some stores and BNPL loan companies offer 0% APR if payments are made on time. 

• May not require a hard-credit check. For example, using Klarna will not impact your credit score. 

• May help build your credit score. Some companies, like Paypal, may report your on-time payments to the credit reporting companies. 

Cons: 

• Interest rates can be expensive. APRs can be upwards of 30% if repayments aren’t made in full and on time, although some do offer 0%. 

• Risk of overspending. Just because you can finance a product over several months doesn’t make it affordable. 

• Late fees. Some companies charge late fees.